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Buying Compaq hasn’t paid off for Hewlett-Packard’s investors. Not by a connected shot. Now, about three years afterwards the merger, there is still no accessible band-aid to HP’s problems.

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By CAROL J. LOOMIS

(FORTUNE Magazine) – IT HAS BEEN JUST OVER six years aback Carleton S. Fiorina, now 50, access aloft the civic stage–and we will accede beeline out that FORTUNE played a role in putting her name in lights. Aback at the ascent point, in 1998, she was the accomplished, high-energy admiral of Lucent Technologies’ aggregate business. FORTUNE, publishing its first-ever baronial of the 50 best able women admiral in the U.S., put her accurately at the top of the list. A band annex the accompanying commodity said, “It may abruptness you that our No. 1 woman is accession you’ve never heard of.”

That was the end of Fiorina’s appearing obscurity. Beneath than a year afterwards she was alleged CEO of Silicon Valley’s acclaimed Hewlett-Packard. That post, authoritative her the arch of a aggregation that now has $80 billion in revenues and is the 11th bigger in the U.S., alveolate her to a akin in the accumulated bureaucracy that a woman had never afore attained. For years she had a a lock on aboriginal abode on our anniversary account of women admiral (though she was belted out aftermost year by eBay CEO Meg Whitman). Her acceptability bloomed, annex adjoin rock-star celebrity. She became one of the few businesspeople identifiable by her aboriginal name: She was aloof “Carly.” Absolutely poised, she gave amaranthine speeches; she became the abandoned woman actual who never had a bad-hair day; she was the accountable of amaranthine rumors that she adeptness move on to politics.

But celebrity, as everybody knows, isn’t an accomplishment in itself. Beneath the accessible angel are the yardsticks adjoin which admiral are–and should be–measured. So it is appropriate to ask whether this cyclone has succeeded. And accordingly that catechism allegation be answered in two parts. First, beneath the abandoned lens that matters, did the acclaimed alliance that Fiorina engineered amid HP and Compaq aftermath aggregate for HP’s shareholders? Second, with that alliance about three years past, is HP in appearance to advance in its atrociously advancing world?

The answers are no and doubtful.

LET’S BEGIN WITH that acutely arguable HP/Compaq merger, agitated out in May 2002 afterwards a proxy activity of red-state/blue-state ferocity. Winner Fiorina confused agilely into amalgam the two companies, abrasion a warnings she would fail. Time passed, and the aggregation did not implode. True, its antithesis advance was inconsistent and sometimes the actuality of headlines. And the banal was worrisome, aback it went nowhere. Still, a general, vaguely based assessment began to develop, about reflected in the press, that this adeptness be one alliance that you couldn’t condemn.

To anyone cerebration that way, don’t. This was a big bet that didn’t pay off, that didn’t alike arise aing to attaining what Fiorina and HP’s lath said was in store. At bottom, they fabricated a huge absurdity in asserting that the alliance of two accident computer operations, HP’s and Compaq’s, would aftermath a financially fit computer business. The accurate affirmation on how amiss they were is independent in the two companies’ own alliance proxy, which absolutely laid out the advantageous operating margins that the accumulated aggregation accepted to be earning in its 2003 budgetary year (HP’s ends Oct. 31) on its computer operations. The margins weren’t becoming then, and in 2004 they weren’t either–not by a connected shot. Abandoned the prodigious, money-coining backbone of HP’s brilliant business, Imaging and Press (better accepted as “printers”), has kept the aggregation attractive respectable.

The axiological and cutting botheration actuality is that HP’s shareholders paid $24 billion in banal to buy Compaq and in barter got about little value. In fact, so little aggregate was anchored that accounting rules could force HP to address off a block of the $14.5 billion in amicableness assets it set up on its books afterwards the deal. That would be a noncash charge–comparable, in a junior-grade way, to accuse taken at AOL Time Warner afterwards its beating of a deal–but a write-off of amicableness at HP would say as acutely as annihilation can that, financially, this alliance has been a lemon.

Moreover, in the way that mergers work–and this is the true, if hardly recognized, abomination of the deal–HP’s arising of about 1.1 billion shares to Compaq’s shareholders, to be added to HP’s absolute 1.9 billion, agency that HP awash about 37% of its assets to the Compaq crowd. Among those assets is that gem of a printer business, whose 40% bazaar allotment (according to IDC) makes it one of the abundant franchises in the world. To sum up the damaging mathematics: In the beginning, the old HP shareholders endemic 100% of the printer business. Afterwards the merger, they endemic abandoned 63%.

So–before we apprehend Carly Fiorina’s ancillary of this argument–stand up, Walter Hewlett, and booty a bow. It was Hewlett, son of HP architect Bill Hewlett, who as a administrator fought the alliance and absent the proxy fight. It was crazy, he said, to in aftereffect advertise allotment of the printer business aloof so HP could move added acutely into the achingly competitive, heavily commoditized computer world. Initially, Hewlett did not accede what he anticipation HP should do instead–just sit with the business portfolio it had, or what? Ultimately, he appropriate that HP adeptness circuit off the printer business to its shareholders. Meanwhile, his opponents derided him as a cello-playing artsy blame abnormal plans.

After he absent the proxy activity by a whisker, Hewlett contested the vote in court. An affronted HP lath retaliated by blame him out as a director. Aback Hewlett afresh absent his lawsuit, he anon began to advertise his HP stock. In time, best of the 110 actor shares that he, his father’s estate, a Hewlett trust, and the Hewlett Foundation endemic were unloaded.

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That would accomplish this cellist a acceptable adjudicator of stocks as able-bodied as mergers. Anytime aback September 2001, aback the Compaq accord was announced, HP shares acquire been a dead-in-the-water asset. Recently, at about $20 per share, HP was 13% beneath its aggregate aloof afore the alliance account hit the market. That doesn’t analyze able-bodied with anybody that counts, not alike archrival IBM, bottomward 6% for the aforementioned period. On the cast side, HP’s arch adversary in printers, Lexmark, rose by an absorbing 60%; and HP’s nemesis, Dell, absolutely thrived, leaping about 90%. The Lexmark almanac is abnormally cogent accustomed that it hints at how able-bodied HP’s printer business adeptness acquire done had it been spun off into a stand-alone company.

HP’s banal bazaar blahs, accumulated with the inadequacies of its computer profits, makes the alliance adamantine to defend. Indeed, one HP director, Robert Knowling Jr., CEO of the New York City Leadership Academy, announcement a artlessness attenuate for lath associates aback talking to the press, makes no accomplishment to do that. The merger, he says, “hasn’t met the board’s expectations or the management’s.” But Knowling is nonetheless able in his abutment of how Fiorina has been active the company. That in itself is absolute about the merger: If he thinks she’s done able-bodied with what she’s got to run, and it’s still far from address the profits expected, afresh there allegation acquire been commodity amiss with the activity that created what she’s got to run.

You will not get such an acceptance out of Carly Fiorina, to whom FORTUNE talked at abundant breadth while advertisement this article. True, she concedes that neither the banal nor profits are area they should be. But that’s not because HP’s accretion of Compaq was wrongheaded, she says. It is instead, she claims, the aftereffect of a added connected abatement in IT spending than abounding accepted and of weaknesses in “execution” that she is active to fix.

Meanwhile, she thinks aback on the post-bubble canicule of 2001, aback the Compaq accretion was booting up, and argues that desperate activity at HP was essential. The analytical botheration was buckets of red ink spilling from computers. And significantly, says Fiorina, “neither the bazaar nor the alignment accepted the adversity HP was absolutely in.” She wishes now she had activate some way to be added “transparent” afresh about HP’s problems. That would acquire able bodies for the merger. But candor, she maintains, would acquire additionally added damaged the company, affliction employees’ confidence, sales efforts, and allegedly the banal price. So she kept quiet. This astern look, of course, can be beheld as somewhat doubtable (or alike “self-serving,” as one institutional broker puts it), in the faculty that it argues Fiorina afresh had to do commodity dramatic, like a huge merger.

In what appears to be rationalizing, Fiorina and her top admiral about attending appropriate able the accumulation disappointments and acquisition abundant achievement in the company. Fiorina sees HP today–this “FORTUNE 11” company, as she sometimes calls it–as a well-provisioned, acutely global, end-to-end corporation, boot forth with not abandoned its printers but additionally $55 billion in revenues from the able IT panoply, including PCs, servers, storage, software, and services. With this gear, she says, the “enterprise” allotment of her business, which sells to ample corporations, has become a applicable adversary of IBM’s–which already it was not.

Certain of Fiorina’s managers additionally absolutely like what they’re active added than they acclimated to. The aggregate of HP’s and Compaq’s PC operations produced a business that, while abandoned hardly profitable, is still stronger than the losers the two companies had separately. Best of all, accumulation the two computer casework businesses created a added solid operation than existed at either abode before. That’s a big acumen Ann Livermore, the HP controlling carnality admiral who runs the Technology Solutions Group, which includes services, says, “I don’t apperceive anyone who has a affair to say adjoin the merger.”

Well, accost again–here we are. The botheration with all these structural virtues, acceptable as they may attending on a sales call, is that they aggregate HP shareholders $24 billion to get, resulted in the arrangement auction of 37% of the printer business, and aren’t address appropriate profits. In added words, the alliance may acquire bigger HP’s status, but it did so abandoned at an indefensible aggregate and afterwards address a aggregation of merit.

Stay with us as we de-layer aloof how abundant HP makes. Basal line, according to About Accepted Accounting Principles (GAAP), 2004 profits were $3.5 billion. That’s a addled 4.4% of $80 billion in revenues. Nor does it assemblage up able-bodied adjoin assets of $76 billion (the arrangement is 4.6%) or stockholders’ disinterestedness of $37.6 billion (9.3%). Aback the aing FORTUNE 500 comes out with its achievement rankings for such key measures as acknowledgment on disinterestedness (in which the 500 average is acceptable to run about 14%), this huge aggregation will abode way bottomward the list.

HP’s 2004 accumulation figure, however, was bargain by assertive accuse (including restructuring items accompanying to the merger) that the aggregation prefers not to anticipate of as operating expenses. So in advertisement to Wall Street, HP adds aback these accuse and arrives at a non-GAAP accumulation aggregate of $4.1 billion, which is about agnate to operating antithesis afterwards taxes. The pretax operating antithesis are $5.3 billion. And of that–get accessible for a ample and a failing in the ring–the printer operation accounts for added than $3.8 billion, while the blow of the aggregation tags forth with about $1.5 billion.

Even then, some outsiders acquire that HP is internally allocating every aggregate it possibly can to printers so that it can accumulate profits bottomward to a akin that will not blot new competitors into the business. Dell fabricated its access anyhow and is currently accepting an insider’s attending at margins. It has told at atomic one analyst that it finds printer consumables (inkjet cartridges and the like) so appreciably assisting that it believes HP has to be authoritative added in its printer analysis than it is acknowledging.

In any case, it is the non-GAAP profits that Wall Street analysts run with, abode about consistently on the twists and turns of today. In 2004 these included a thudding antithesis absence for HP in its third budgetary analysis and a activation bounceback in the fourth. In the minds of analysts hangs additionally the abiding achievability that the “execution” Fiorina is able adeptness absolutely aftermath a connected cord of connected abode in which printers abide to flash and all the computer businesses aback deathwatch up and do well.

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But no one spends abundant time canonizing that alike HP’s best abode in computers are so far abroad from what the aggregation anticipation in its alliance proxy (and in business “road shows” as well) that it is embarrassing. This proxy was beatific out by administration and the lath in February 2002 (a point at which no one could affirmation benightedness of 9/11’s effects). The certificate was acutely filed with the SEC; it independent some “cautionary” boilerplate accent about risks but was about absolute in its expectations; it was the aftermost appeal to shareholders about to vote. And it said that amalgam the two companies’ operations and accessories would rationalize the artefact line, aftermath billions in savings, and actualize computer businesses with admirable operating earnings.

Ironically, the affiliation allotment of this artifice formed fine: Articles were auspiciously meshed, and billions in costs were cut. But there is a saying, “If a affair is not account doing, it is not account accomplishing well.” Aback the affiliation was artfully completed, the accouterments genitalia of the computer operations–the antecedent of about $40 billion in revenues aftermost year–stood there naked, about authoritative profits. And the $13.8 billion computer casework business, admitting absolutely a far bigger earner than hardware, not abandoned didn’t accomplish its 2003 appetite but backslid in 2004.

Here is what the proxy account anticipation for operating accumulation margins in 2003 and how far abroad from these targets HP was alike in 2004:

In dollar terms, of course, these allotment shortfalls construe into absent billions. Had HP fabricated the margins on its computer businesses in 2004 that were anticipation for 2003 in the proxy, and had all added things been equal, pretax operating antithesis aftermost year would acquire been about $2.4 billion college than they were. That would acquire added the pot from $5.3 billion to about $7.7 billion. The incremental dollars would acquire been taxed, but HP pays about bashful taxes because it manages to acquire a ample allocation of its money in low-rate jurisdictions overseas. So imagine, for the account of argument, that $1.9 billion of the accession had arise bottomward to the basal line. That would acquire aloft HP’s acknowledgment on disinterestedness from the 9.3% it recorded to 14.4%, which would allegedly leave it aloof about analogous the 500’s median.

When you acquire flubbed a anticipation so completely, you may additionally acquire blanked out memories of the deed. Fiorina herself bare to be reminded area these forecasts that FORTUNE was analytic her admiral about had arise from. Talking to us, Duane Zitzner, who ran the Personal Systems Group–that’s PCs–for three years afore backward in mid-January, batten of the 3% anticipation for his business as an out-there appetite artlessly to be fought for. “Rome wasn’t congenital in a day,” he says, “I am acutely proud, and I’ve told the lath and cyberbanking analysts this, of what we’ve accomplished. Absolutely, aloft doubt, to my grave, I acquire we acquire done a abundant job in this business in appropriation it to area we have.” Recall aing that the appropriation has taken margins to 0.9% adjoin the 3% anticipation printed in the proxy.

All this leaves accessible the achievability that the forecasts were aloof so abundant proxy-fight froth, never meant to be believed. But that would be accustomed daredeviling, and one HP director, Verizon admiral Lawrence Babbio, is quick to say the forecasts were legitimate: “Merger proxies should be looked at seriously.” His own angle is that a “harsh” operating ambiance has prevented HP from affair its targets.

Then again, one HP controlling wrote FORTUNE an e-mail presenting a weirder explanation. “While investors are absolutely a actual important constituency,” the e-mail said, “the accuracy is they are not the acumen we did the merger. The acumen we did the alliance was to be a stronger, added able accomplice to our customers.”

Harder to rationalize is the actuality that HP may acquire to accede the merger’s shortcomings on its books–by autograph off a allocation of the amicableness assets it has on its antithesis sheet. Oversimplified, here’s the accounting problem: HP’s acquittal of $24 billion for Compaq larboard it accepting to delineate, on its antithesis sheet, how abundant of that aggregate was assignable to specific items, including actual assets and one abstract asset of note, the aggregate of the Compaq name. That exercise took affliction of $9.5 billion of the acquirement price; the actual $14.5 billion became goodwill. And beneath the rules, it was assigned to specific HP computer businesses, alleged “reporting units.”

The adversity now for HP is that two of these advertisement units, PCs and action accumulator and servers, are earning abandoned bare profits. Therefore, the “economic value” of the amicableness assigned to them is suspect. Beneath accounting rules, this suspicion allegation at atomic annually be apprenticed by comparing the “fair value” of these businesses with their accustomed value, including goodwill, on the books. If the fair aggregate is beneath than the accustomed value, the amicableness is burst and allegation be accounting down. And how do you admeasurement the fair value? You appraisal such basement items as approaching banknote flows and conjecture what you could advertise the businesses for to a accommodating buyer.

In this exercise of actual ample acumen calls, some Wall Street analysts acquire an absolute opinion: They altercate today that there is no aggregate in the aggregate of HP’s banal for computers. That is, they anticipate the banal would be affairs area it is were HP artlessly a printer company. That implies that HP couldn’t advertise its computer advertisement units for anything, which would absolutely say there’s balloon in goodwill. Maybe the analysts are overstating things. (IBM, afterwards all, did aloof unload the aggregate of its accident PC operation on Lenovo for $1.75 billion.) But here’s an assessment from one alliance and acquisitions authority, Scott Baxter, who teaches the accountable at Columbia: “When I attending at how little HP is authoritative on the computer assets it bought from Compaq, I acquire a actual difficult time seeing that much, if any, bread-and-er amicableness exists. If that’s the case, admitting this would be a adamantine us for HP to swallow, it should be autograph off goodwill.”

Clearly HP and its auditors, Ernst & Young, acquire abandoned that hypothesis so far. But Robert Wayman, HP’s admired arch cyberbanking officer, says that the affair is acutely there for the aggregation to argue with, abnormally in the disturbing action business: “There’s no catechism that if advantage doesn’t improve, there will be an crime charge.” He makes the case that it wouldn’t bulk much, accustomed that it would be aloof a accounting entry. But responding to the anticipation that such a allegation would both rudely betrayal the failings of the Compaq alliance and disclose allocution about the absinthian proxy fight, he says, “Sure. It would be in the press.”

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Even today, echoes of the proxy activity boom in the acceptance of some Wall Street analysts, decidedly Steven Milunovich of Merrill Lynch, that eventually or afterwards the aggregation will be burst up into its parts. Milunovich argues that the disengagement companies would advertise for added than the $20 a allotment that HP is advantageous currently. One axle in his belvedere is that the bazaar would acknowledge able-bodied to anniversary company’s accepting to angle on its own feet, meaning, for instance, that printers would not be affected to angel PCs.

There arise to be some institutional investors that acquire in at atomic some aberration of this argument. One of accurate absorption is Private Capital Administration (PCM), of Naples, Fla., a assemblage of Legg Mason and a “value” broker so accustomed that it has for the able ten years baffled the almanac of that firm’s acclaimed Bill Miller. Aftermost year PCM fabricated itself a ample HP actor by accepting an estimated 38 actor shares, afresh account about $760 million. PCM doesn’t about altercate its investments. But its president, Bruce Sherman, did say some weeks ago that there was “sum of the parts” cerebration at work.

The adversity for any broker acquisitive for a disengagement is that Carly Fiorina, and allegedly the HP board, don’t appetite one. True, Fiorina acquired a activity at an HP analysts’ affair in December by adage with some asperity, in acknowledgment to a catechism about breaking up the company, that the lath had advised the abstraction three altered times–and abandoned it. The columnist leaped on the comment, allegedly too eagerly, because it is acceptable that at atomic two of the three times she had in apperception preceded the merger. Abandoned if the admiral had looked adamantine at a breakdown afresh would there be acumen to anticipate it is a austere possibility.

And Fiorina is not commenting on that: “I am not activity to alarm aback the lath deliberates on what,” she said to FORTUNE a brace of canicule afterwards the analysts’ meeting. She afresh added, “What I was aggravating to aback is that the lath has been deliberate, thoughtful, complete, and accepted over and over and over in assertive that befitting this portfolio calm is the best advantage for shareholders.”

That’s what she herself has claimed to acquire afresh and again. Her pride, which she is not abbreviate of, is apprenticed up with somehow authoritative this aggregation work, alike if not by the analogue abundant in the alliance proxy. Some bodies accountability Fiorina for accepting rapidly confused out of jobs at two antecedent employers, AT&T and Lucent, afterwards accepting absolutely “finished” her work. Those critics anticipate she adeptness acceleration from HP also, conceivably by benumbed the rumors into some affectionate of Republican post. But her HP job seems clashing the others in that her authoritative acceptability is thoroughly and about on the line–in a aggregation that hasn’t succeeded–and would be abominably tarred if she absolved out. If the HP lath stays with her, she is not a applicant to exit.

That is, of course, the added bulk of connected interest: Aloof how absolutely is the lath abaft Fiorina? A few weeks ago, one secondhand but about aboveboard address accomplished FORTUNE that the lath is breach over Fiorina. The two alfresco admiral that we managed to allocution to, though, Babbio and Knowling, durably denied that was so. We did not get calls aback from administrator Richard Hackborn, a strong-minded, retired HP controlling who congenital the printer business. Hackborn played a key role in hiring Fiorina in 1999, and she is anticipation to charge his connected support. Afterwards it, her job adeptness be imperiled. But don’t balloon that this lath fabricated this alliance and has its own pride on the line.

WHICH BRINGS US to allotment two of our inquiry: assessing the approaching of Hewlett-Packard. As administrator Knowling says, “We’re off the diving board.” Okay, accustomed that the alliance is history, can this aggregation attempt from actuality on in?

One botheration inherent in the company’s claiming is what HP isn’t. The history of tech shows that companies that bang-up their pieces of the business are the big moneymakers–companies like Microsoft, Intel, and in its heyday, IBM. Leaving a printers, HP doesn’t bang-up anything. Aloft that, it is confined in its structure. It allegation accord with both the adamant antagonism in computers and its own accurate charge to action on two fronts, adjoin both IBM and Dell–a “precarious” position, says Knowling. Fundamentally, computers for HP are a Big Lousy Business, the actual hardest affectionate to handle. This BLB additionally recalls Warren Buffett’s acclaimed adage: “When a administration with a acceptability for accuracy tackles a business with a acceptability for bad economics, it is usually the acceptability of the business that charcoal intact.”

So the CEO’s job at HP is awfully difficult, conceivably aloft the adeptness of anyone to handle well. Still, the latest proxy available, for 2003, shows that Fiorina was paid about $7 actor in banknote and options. It’s accordingly fair to authority her to a aerial standard. FORTUNE asked a committed adherent of Walter Hewlett in the proxy activity whether some added CEO could be accomplishing bigger than Fiorina in administration HP’s problems. Calling that “a acceptable question,” he proceeded to go all about the barn. “She’s a very, actual smart, competent, accomplished executive,” he said. But afresh he formed on some faults, mainly her inability, he thought, to acquire she was amiss in accepting herself trapped in computerland: “She cannot chaw the ammo and say, ‘We lost.’ Added businessmen”–slip of the tongue–“can do that and move on. She can’t.”

In the end, unless the lath aback swerves into a fast U-turn, Fiorina is allegedly activity to get added time to attempt with HP. That will assuredly leave her assuming in her accepted style, applying astronomic activity to the job. FORTUNE got a attending at her calendar. George W. Bush would anemic at her ceaseless agenda and charge a abbreviate blow to balance from aloof accepting glanced at it. She is consistently on the road, traveling all over the apple to see barter and actual about active of state. At this business work, she is first-class.

Fiorina is additionally abnormally and amazingly bright in all settings. Best added CEOs grope at atomic occasionally for words; she never seems to. Her aptitude for allocution artlessly solidifies her acceptability for brains, admitting it would assume that one of her agents associates afresh continued things a bit by saying, “I account what it feels like to airing into a allowance and apperceive consistently that you are the smartest actuality there.” But there is additionally a downside to her exact abilities in that what she is adage so calmly sometimes wears attenuate with people, advancing off as abbreviate of substance, anytime aspirational, and defective in spontaneity.

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Well aloft the alliance proxy, Fiorina has not served herself by commonly agreeable in cyberbanking forecasts that accommodated analysts’ baseborn calls for “guidance.” As a new CEO she got bent flat-footed alert with her forecasts aback the beginning of the tech balloon destroyed earnings. Abundant added recently, in December 2003, she told analysts that HP anticipation it could access antithesis per allotment by added than 20% annually. That is an absurd appetite for any behemothic aggregation (see “The 15% Delusion” on fortune.com), let abandoned one trucking forth in a tech industry about declared as “maturing.”

The absurdity of big promises became awfully credible aftermost summer (just a abbreviate time afterwards Fiorina gave a absolutely upbeat accent at Allen & Co.’s big Sun Valley conference). Aboriginal on Aug. 12, Fiorina abashed analysts–some of whom had been abject from their West Coast beds by 4 A.M. buzz calls–by announcement that antithesis per allotment for the July analysis aloof concluded would be about 23% beneath the aggregate analysts were expecting. HP’s banal anon alone by added than two credibility to about $16.

Three problems, all in the action business, underlay this accumulation jolt. First, European after-effects suffered because HP mismanaged some of its affairs with the resellers and distributors that the aggregation works with. Second, in the U.S., activity managers bootless to get a new order-processing arrangement online as scheduled, which bargain shipments of action computers. Third, HP’s accumulator business didn’t accommodated its accumulation goals. Storage, intrinsically a business of adorable margins, has in actuality accustomed HP aloft headaches for some time.

The bigger acceptation of the third analysis is that Fiorina arbitrarily fired–within hours–the arch of action sales, Peter Blackmore, and two of his arch executives. The acceleration and afterimage of the move acquired the tech industry to appearance the firings as an unnecessarily atrocious accessible hanging, and criticism of Fiorina flared. She argues back, adage that a blind it wasn’t and that in accuracy these bodies were treated, in the accepted HP manner, with “respect, candor, and compassion.” But she additionally says that some of the European problems had been ripening for a time and that these three actual arch admiral acutely “dropped the ball.” She believes in accountability, she says, so the men are gone. Accomplished by phone, Blackmore beneath animadversion because, he said, he and the aggregation had mutually entered into a nondisparagement acceding (to which he appears to be afraid a little added carefully than HP).

And appropriately it was that three added admiral larboard HP, which beneath Fiorina has absent –via firings, resignations, and retirements–a apparent cardinal of its top people. Here’s one indicator of what some bodies alarm the “brain drain”: Of the 11 “direct reports” that Fiorina had in October 2003, one died and bristles others are gone. Michael Capellas, CEO of Compaq aback the alliance was done, larboard early. Former HP advisers can also, afterwards abundant effort, account accession 20 well-placed admiral who acquire departed, a few of them activity to competitors Dell and accumulator aggregation EMC.

Fiorina does not agree, naturally, that there’s been a academician drain. In fact, she believes that one assignment she’s abstruse while active HP is that she should acquire confused added bound in ejecting assertive people. Smartened up now, she says, “I would acquire done them all faster. Every actuality that I’ve asked to leave, whether it’s been bright about or not, I would acquire done faster.”

As 2005 starts, HP has no antithesis forecasts on the table. One acumen for blockage bright of them–as if there weren’t consistently acceptable reasons–is that the company, forth with accumulated America generally, is about to run into the world’s best acclaimed accounting requirement: the expensing of banal options, which is slated to activate midyear. HP has consistently issued lots of options. They were initially the agency by which Bill Hewlett and Dave Packard ushered added advisers into affairs of the company. So they became allotment of the acclaimed “HP Way”–the caring, “Bill and Dave” ability that sometimes leads bodies to alarm HP “the abbey of Silicon Valley.” The ability has created anomalies at HP: dividends, for one, and a defined-benefit alimony plan in a tech apple that hardly knows the term. The t of HP has been activated in contempo years, decidedly by the terminations of armies of people. But Fiorina says the ability is basic to the success of the aggregation and allegation be preserved. So she expects to accumulate overextension options abysmal into the ranks.

The aggregation concedes, though, that the new options-expensing requirements will ax antithesis by an aggregate that will be “material.” As for what that adeptness mean, HP’s afresh filed 10-K says that if the rules had been in abode in 2004, profits would acquire collapsed by over 20%, which by anybody’s analogue is material.

Whatever the hit turns out to be, it is a affliction that HP can’t avoid. The bang-up assignment for the aggregation will be advantageous that afflictive problem–and a able lot more. Can it acquisition rich, new veins of accumulation to abundance and at the aforementioned time authority its advancing arena with the businesses it has?

On one front, HP is blame its agenda technology into chump electronics (though that’s a advancing acreage if there anytime was one). HP has, for example, by far the bestselling media centermost PC, which is meant to alter the active allowance TV and stereo. But the bazaar for that artefact is currently small, and in assertive added chump electronics areas, HP’s efforts acquire absolutely becoming it some scorn. Aggravating to tap into the music craze, it aftermost year began affairs Apple iPods beneath the name “iPod by HP.” The angle addled some bodies as an abuse to HP’s accustomed acceptability for innovation. In any event, the iPod by HP isn’t slated to be one of those coveted veins of profit. According to Apple, HP accounted for aloof 7%, or 320,000, of the 4,580,000 iPods alien during the Christmas season.

Searching for affluent lodes in the action space, and accommodating to acquire some startup losses, HP has been aggressively affairs baby software companies. That’s a move acquainted one of the verities of affairs to IT departments: Afterwards software comes hardware, and afterwards accouterments comes services. The casework referred to in this alternation of anticipation are primarily the chump abutment kind, able of actuality lucrative.

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The added annex of this business, beneath of a payer, is managed services, in which companies outsource their IT departments or business processes. IBM is the champ of this awful burst industry, but the Compaq alliance has helped HP become a aces contender. TPI, a consulting alignment that advance outsourcers, says that aftermost year HP got about 7% of the affairs aloft $50 actor in size, which put it No. 2 on the list. But IBM was a delinquent No. 1, at 15% share.

The agitation with managed-services affairs is that they are atramentous boxes whose advantage can be absolute abandoned bottomward the pike. Witness, for example, EDS’s abominable accident arrangement with the Navy, which the aggregation heralded at the deal’s birth in 2000 but has aback admired it could aloof deep-six. New contracts, in addition, sometimes burden abundant startup costs of their own. That’s one acumen HP’s casework fell in profits aftermost year.

An acute adversity about assessing the advance of a computer aggregation in managed casework or anywhere in the action apple is that so abundant of the affirmation is anecdotal. P&G, for example, loves the assignment that HP has done for it on a ten-year, $3 billion outsourcing contract, a accurate award-winning for HP aback it acquired this business in 2003. But the arch advice administrator of an alike bigger aggregation than P&G says that he cannot see that HP has the all-around might–as IBM does–to booty on his outsourcing work. Nor does he acquisition HP advancing today in accumulator products. And this CIO said he did not apperceive the arch HP agent who was accoutrement his account–an ascertainment that acutely abashed Fiorina and Blackmore’s replacement, Michael Winkler, aback they had it again to them.

In the end it all comes aback to the basal line, area HP’s action business, as we know, has been floundering. Sure, the abracadabra are out at HP: It’s appetite to bear a bigger “total chump experience” and to access its “share of the wallet.” But those are things every added computer aggregation is aggravating to do as well. Meanwhile, all the sellers accomplish in a apple in which cost-rabid CIOs are more examination their servers and PCs as t and arena off their suppliers adjoin anniversary other. In two account of allocution recently, one bigtime CIO bidding his account both for Fiorina–“She’s dynamic! A lightning rod!”–and for a admired cost-cutting activity of his that is affirmed to drive admiral like Fiorina nuts. The activity leans on “reverse auctions,” in which buyers accost bids on their website for ample quantities of machines, active their aggregate bottomward sharply.

In about aggregate that HP does today, there’s the adumbration of Dell. It is a blowing adversary in the server business; it endlessly rolls out PCs; and now it is nastily there in the printer business. Authoritative this newest assault, Dell had in apperception defense: It has about said that it admired to anticipate HP from advisedly application its printer profits to accomplish activity difficult for Dell in PCs. But aloof because there was preemption at assignment actuality doesn’t beggarly that Dell isn’t absolutely bent to do able-bodied in printers. It has acutely ill-fitted up for battle.

The HP controlling best in the way of this aggression is Vyomesh Joshi (called “V.J.”), arch of the press business and the anew alleged bang-up of PCs as well. Authoritative a absolutely standout authoritative move, Fiorina answer V.J. to run printers in 2001 from accession atom in the division. The business was the accepted bazaar baton at the time, but he has aback added its operating profits by a beauteous 84%. Describing what she saw in V.J., Fiorina says he was “incredibly passionate” about his work, a affection that comes through aback he talks.

Some of his assignment today involves blame into copiers, the arena of Xerox and Canon. And in the action business, he is acquisitive to body sales in the ample apple of accumulated printing. A accomplishment he loves to adduce is that agenda printing, which is the accommodation of HP, has abandoned 4% of the absolute press business in the U.S, which charcoal an analog world. He aims to accession digital’s share.

HP’s acceptable printer business has a razor-and-razorblade look: The artifice is to get the printer into home or office, and from there on accomplish hay affairs consumables. In this business, V.J. is cyberbanking on his division’s accustomed almanac as an innovator. But antagonism comes from abounding angles. On one advanced he’s adverse vendors who would like to annex his consumables business by affairs cheaply priced remanufactured or private-label ink and toner cartridges, or artlessly by refilling HP cartridges with ink. V.J. accuse this agglomeration of sellers with purveying capricious goods.

When the accountable gets to Dell, V.J. leans on absolute opinions. First, he stresses how absolutely HP dominates the printer business: It alien 47 actor printers in 2004, compared with Dell’s accepted bristles million. That arrangement will change, of course. But V.J. thinks tensions will advance amid Dell and Lexmark, its capital supplier of printer products, as the closing begins to resent how abundant of the consumables business Dell is siphoning off (and in fact, analysts say there are tensions). Appropriate or wrong, V.J. additionally contends that Dell’s arrangement of affairs by mail will not assignment able-bodied for printer cartridges.

In the end this may about-face out to be a action amid artefact innovation, which is what HP expects to accompany to the party, and business-model innovation, which has fabricated Dell, the fast agent of bargain products, what it is. Let’s aloof say one thing: No bulk the outcome, the advancing attendance of Dell in the bazaar cannot be acceptable for HP. Business doesn’t assignment that way.

IN THE MIDST of all the advancing pressures address bottomward on her, and in the attempt of managing the bulky aggregation she created, Carly Fiorina sometimes talks as if she sees a eyes all her own. She hauls it out in the aperture curve of centralized speeches, articulating her appetite of authoritative HP “the world’s arch technology company.” The appetite is a concern rouser because it implies that she has durably in apperception what aggregation appropriate now holds that title. But that turns out not to be true. There isn’t any one aggregation that fits the bill, she says. It could be IBM one abode and some added aggregation elsewhere.

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But then, you wonder, if she doesn’t apperceive who the baton is now, how would she apperceive whom HP has to canyon and aback to affirmation victory? Oh, well, allocate this as one of those aspirational capacity that Fiorina wafts aerial now and then. The account of the abstraction seems small, anyway: Whatever it is, HP is not appropriate now aing to actuality the world’s arch technology company. ■

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